New California Disclosure Rules for 501(c) Organizations that Make Independent Expenditures

When does a 501(c)(6) trade association have to disclose its members to the public? Not often, as the schedule of contributors provided to the IRS is not a public document. California – as is so often the case – has other ideas about that. If a 501(c) organization makes independent expenditures in California state races, or is involved in a ballot measure, new rules from the California Fair Political Practices Commission will require disclosure of certain members or contributors.

New Rules:

On May 19, 2012, the California Fair Political Practices Commission’s (“FPPC”) new rules governing disclosure became effective. These new rules require organizations, such as 501(c)(6) trade associations, 501(c)(4) social welfare organizations, and 501(c)(3) charities, to disclose certain contributors or members if those organizations are involved either in independent expenditures supporting or opposing candidates or an effort to support or oppose ballot measures (note that charities can only be involved in the latter).

California law requires any entity that that raises, contributes, or makes independent expenditures of over $1,000 to register as a political committee. That has been the law for some time. What is new is how these entities must disclose donors. There are two types of donors that must be disclosed:

Any donor that “makes a payment in response to a message or a solicitation indicating the organization’s intent to make a contribution or independent expenditure,” will have to be disclosed as a donor.

If the organization uses funds that were donated without that knowledge, then the organization must disclose its donors using a last-in-first-out accounting method until the amount of the expenditure is fully accounted for.

The second prong is only triggered if the organization has made an expenditure or contribution prior to the time the payment was made. In other words, the FPPC’s regulation takes the view that such donors had constructive knowledge that their contribution might be used for a political expenditure. If even these donors do not cover the costs of the expenditure, then the organization lists itself as the contributor.

An organization may avoid disclosing a donor based on “evidence clearly establishing specific circumstances that show the donor did not intend that its payment” would be used political purposes. The rule is silent as to what type of evidence would be sufficient.

Example:

Because these rules are so complicated, an example might help. Imagine a trade association that raises $10,000 from donors with an explicit ask that these contributions will be used for an IE. It then contributes $9,000 to an independent expenditure committee. The association itself will be treated as a political committee subject to registration and reporting. It will disclose the $9,000 contribution out and the $10,000 in contributions in. Next the association makes another contribution to an IE committee of $5,000. It has disclosed $1,000 of the source of that contribution (from the prior funds it solicited), but will now have to report the last $4,000 in revenue it received from members who contributed (e.g., through a dues payment) after the trade association made the $9,000 contribution for the IE effort.

Bottom Line:

This new rule may require 501(c) organizations to disclose far more about their donors if they are active in California. Nonprofits will have to think carefully about their activities and what they will have to disclose. Members and donors will have to be careful to understand whether their contributions or even dues payments may have to be disclosed – and linked to a trade association or other group’s political activity.

The rule is unlikely to accomplish much in terms of disclosure – how much value is there in knowing which widget manufacturers contributed to the Widget Manufacturers Association? – but it certainly stands to complicate the relationship between advocacy groups and their donors.